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Google Deal Puts Africa on Cusp of First Smartphone Plant

(Bloomberg) -- A Johannesburg startup is set to become the first company ever to manufacture smartphones in Africa, taking advantage of low costs and growing local demand to build handsets, tablets and other devices based on Google Inc.’s Android system.

Onyx Connect, a privately backed company that’s raised 150 million rand ($10.8 million), will begin production in the first quarter, according to Andre Van der Merwe, its sales director. The company is licensed to load Google software like Android and Chrome onto devices sold under its own brand or products it makes for others.

“We are talking to companies to manufacture handsets, laptops and possibly Android TV boxes,” Van der Merwe said in an interview. Those talks include Google itself and Johannesburg-based Vodacom Group Ltd., the South African unit of Vodafone Group Plc, he said.

Vodacom would “welcome the opportunity” to offer high-quality devices made in South Africa, Jorge Mendes, a Vodacom consumer sales and distribution executive, said in an e-mail, declining to comment on Onyx specifically.

For Google, local production would stoke a sales push in Africa, one of the few regions where it isn’t the outright browser leader. The Alphabet Inc. unit trails Opera, which accounted for 39 percent of web traffic in September on the continent, versus 32 percent for Google Chrome, according to StatCounter Global Stats. In addition to software Google makes devices like Chromecast media players and Chromebook Pixel laptops.

“With most Africans accessing the internet for the first time on smartphones, it is important to ensure affordable devices are available so that people can access the benefits,” Google said in an e-mail.

While a $600-plus iPhone or Samsung Galaxy S7 is prohibitive to most African consumers, Onyx says it can produce a device in Johannesburg for about $30 that includes a camera and 1 gigabyte of memory. The company is setting up a distribution center in Ethiopia within the next 12 to 18 months, Van der Merwe said. He said the project will create 600 jobs.

A drop of about 40 percent in the value of South Africa’s rand against the dollar in the past five years has helped open the door. It’s made labor less expensive in Africa’s most industrialized economy, while making phones imported from China or elsewhere in Asia harder to afford. Manufacturer subsidies have largely fallen away, limiting the availability of devices in the more-accessible price range of 600 rand ($42) and below, according to Arthur Goldstuck, director of researcher World Wide Worx in Johannesburg.

“The risk with such investments is that the company is entering an industry where your marketing budget will have to be massive and you are competing with companies that have the biggest research and development spending in the world,” Goldstuck said. “It can also be difficult to compete with economies of scale made possible by vast volumes of devices assembled in massive factories in China.”

Onyx Connect’s plan involves tapping into China’s strengths. The company sourced circuit-board designs and raw components from China, but it’s designing the rest of the phones and building them itself from the circuit board up. The plastic cases are being produced locally, and Onyx has its own research and development capability, Van der Merwe said.

Some South African companies, including Sekoko Mobile, Zest Mobile and Mint Mobile, are already assembling smartphones from imported kits. By going a step further and actually manufacturing the devices, Onyx is saving on import duties.

Along with the savings on shipping and government incentives, “we are able to compete right here,” Van der Merwe said.